Friday, 21 November 2008

Bail outs and economic stilumus packages mask real trouble lurking at the bottom of the economic garden's Gerard Jackson certainly has a take no prisoners style in his writing on economics and politics.

He gains credibility with me because he attacks both the left and right for getting economic policies wrong.

Jackson has been warning for a long time (at least a couple of years) about the expansion of the money supply by the world's major central banks, which could only ever lead to artificially low interest rates that in turn lead to malinvestments and inevitable bubbles.

And, as we all know, bubbles eventually burst and that's what we're seeing now as the world deleverages from these malinvestments.

It is quite unfortunate that the financial issue has arisen at the same time that Keynesian economists hold sway in the major economies.

The history of spending one's way out of a recession has a zero percent success rate, as this latest effort will, as well.

How often have you heard a commentator talk about consumer demand driving the economy? Too often, is the answer.

Jackson does
not see good news from the US in his column of a couple of weeks ago.
Just as I predicted, the US economy is in another recession. For this you can thank the lousy economics that is taught in universities and practised by the fed. Once again, manufacturing was the first to signal an oncoming recession. When an economy reaches the final stage of the boom productivity usually declines. The US Department of Labor reports that manufacturing productivity has fallen for the second consecutive quarter

So what is the brilliant Mr Obama and his equally brilliant fellow Democrats going to do about it? Well, if they are to be taken at their word, and I see now reason why that should not be so, then they will sink the US economy. Unfortunately, this means that those Americans who had the good sense to see through his veil of economic ignorance will also pay the price for having him as president.

Nancy Pelosi — undoubtedly one of the dumbest people to ever be elected to the Senate — is proposing a stimulus package of between $60 billion and $100 billion. There are rumours coming out of Goldman Sachs that Obama will make it $200 billion. America's greatest economist also said that there would be a tax cut next year to help expand the economy but it would not include a cut in the capital-gains tax. Instead she wants to put the money in workers' pockets. What she really means is that she and her fellow pickpockets intend to transfer millions of dollars from those who earned them to those who didn't, safe in the knowledge that the grateful recipient will continue to vote for Democrats, at lease until the money well runs dry.

However, let us put cynicism aside — difficult as that is when dealing with something like Pelosi — and focus on the economics of the Dems' tax proposals. Lurking behind these proposals is the Keynesian fallacy — it is, in fact, one of the oldest economic fallacies around — that increased consumer spending will promote economic growth. Therefore the handouts are justified on the grounds that those on lower incomes, however defined, have a very high propensity to consume (hifalutin jargon for they'll spend all of the loot).

But this is precisely why this kind of monetary stimuli will actually aggravate the recession. This, unfortunately, is where it might get a little technical. Every economy has a production structure, including even primitive agricultural societies. The more advanced the society the more complex the production structure will be. This structure is sensitive to changes in interest rates. Therefore, when the central bank forces rates down below their market clearing levels they spark a boom.

In creating a boom the inflow of money distorts the production, throwing it out of kilter. These distortions are malinvestments that require more and more monetary injections to remain afloat. Eventually the central bank is forced to step on the monetary brakes which sends the economy into recession. (It's a lot more complicated then this). The recession is really the adjustment process during which these malinvestments are liquidated and equilibrium is restored.

Now if the additional spending by the recipients of the Democrats' generosity is offset by reduced spending by those who were bludgeoned into paying for it there will be absolutely no change in aggregate spending. So if there is no change in aggregate spending there can be no stimulus. Moreover, if those who are paying these phony tax breaks cease saving in order to maintain their level of consumption then there will be less investment — and it is investment that drives up real wages.

If the handouts are funded by the courtesy of an obliging fed this will add to inflation. Moreover, the additional spending on consumer goods will distort the price structure (yes, there is also a price structure) by diverting factors away from the higher stages of production to the lower stages, those stages that are close to the point of consumption, resulting in a great deal of excess capacity. This is what happened in the 1930s. (Try as I can, I still cannot think of an economic recovery that was driven entirely by the demand for consumer goods). As soon as additional monetary injections start driving up prices and the current account deficit the fed would have no alternative but to once again slap on the monetary brakes.

The only genuine stimulus is from cutting taxes on business. It ought to go without saying that if you want more of a good or service you must reduce the cost of producing it and vice versa. (But I have to constantly remind myself that we are dealing with Democrats, people for whom economic laws simply do not exist). It follows with ineluctable logic that reducing the cost doing business will lead to more business. You know the sort of thing I mean, investing and hiring people. (See
The US recession and Obama's destructive economic snake oil).

This is iron law of economics was denied by both Hoover and Roosevelt. The result was the tragic '30s, for which brilliant economic historians like Pelosi, Reid, Byrd, etc., are still blaming Hoover. No matter how low interest rates fell business remained comatosed, which completely baffled Roosevelt and his absurdly named "brains trust". What these great minds were unable to fathom is the simple fact that businesses are not going to invest and hire if you confiscate their profits, including regulating them away. God, before you know it Pelosi and her fellow footpads will be resurrecting Roosevelt's dismal Public Works Administration or something like it. And that would be a sure sign of economic failure.

Rest assured that no socialist or meddling politician is ever short of ideas for running an economy. Mr Obama is no different. He and his fellow compulsive meddlers are going to splurge hundreds of billions of dollars (it doesn't sound like much if you say it quickly) on so-called clean energy. It's neither clean, nor cheap, nor economically responsible. This expenditure would amount to the creation of masses of malinvestments, 'investments' that cannot pay for themselves because they are grossly inefficient economically. If fully implemented Obama's energy policy would lead to a hideous rise in domestic energy prices that would badly cripple the American economy. The left would finally get their hateful wish: A greatly weakened and humiliated America.

But what about Obama's economic advisors? Well, what about them? From what I understand they are nothing but a bunch of vulgar Keynesians. Let's take Larry Summers for example. This genius, who aspires to be Obama's Treasury Secretary, is arguing that there needs to be more government interference in the economy. Brilliant, policies favoured by so-called economists like him cause a economy and trigger a massive financial crisis. And he has the gall to ask for more of the same. Summer's seems to have overlooked the fact that Freddie May and Freddie Mac were brought down by political meddling, not to mention a number of kleptomaniac Democrats.

Summers actually shines against some of Obama's other economic advisors, one of whom is Jennifer Granholm. This woman is surely remarkable. Her mismanagement helped to destroy Michigan's economy. So what did the good citizens do? They voted for more of the same. Then there is the corrupt Elliott Spitzer. The damage he did to New York's economy cannot be measured. This is what Obama calls change! I'm telling you, kiddies, it's going to fun times ahead.

Before I finish, a few words about Obama's dishonest tax proposals. When he says spread the wealth he is talking about raiding the incomes of those on $250,000 and above. (I don't doubt for a moment that the figure will be lowered). I stress once again that he is talking about incomes. But incomes are not wealth. If he were honest he would call for a wealth tax but he won't. This means that his billionaire friends will not be touched by his tax proposals. (See
Teresa Heinz Kerry: You pay taxes, I don't)

But those struggling to accumulate wealth will be hit and hit hard. Do you think Buffet, Soros and the rest of that oily sanctimonious crew would have poured in tens of millions of dollars into Obama's election campaign if they thought for a moment he would raid their assets once he was elected? Of course not. These people are supporting tax increase that they don't have to pay and won't. They bought Obama and he had better bloody well stay bought. They are truly a despicable bunch.
The announcement that President-elect Barack Obama picked Timothy Geithner, head of the Federal Reserve Bank of New York, to be his Treasury secretary sent the stock market north as Wall Street responded positively.

Geithner is a colleague and former student of Larry Summers, an arch Keynesian, which does not bode well for the long term.

He is already on record stating that elements of the bailout should become permanent.

No wonder Wall Street rallied on news of his appointment.

(Nothing Follows)


Anonymous said...

Gerry Jackson is the only commentator I have read who has repeatedly and comprehensively demolished John Quiggin and other Keynesians.

Jack Lacton said...

It's remarkable, isn't it, that Quiggin is held in such high regard when his policies continue to be shown to be damaging?

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